Chase v. Commissioner , 44 B.T.A. 39 ( 1941 )

GERTRUDE B. CHASE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Chase v. Commissioner

Docket No. 97902.

United States Board of Tax Appeals

44 B.T.A. 39; 1941 BTA LEXIS 1394;

April 3, 1941, Promulgated

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Where, pursuant to a plan of reorganization, T corporation merged with R corporation, and stockholders of T delivered practically its entire stock and received stock of R corporation in exchange, the nonrecognition provision of the Revenue Act of 1936, section 112, held applicable under all the circumstances, notwithstanding temproary lodging of T company stock in R company's subsidiary.

Truman Henson, Esq., and Roy G. Peterson, Esq., for the petitioner.

James C. Maddox, Esq., for the respondent.

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OPPER

By this proceeding petitioner contests the correctness of a deficiency of $21,662.84 determined in her income tax for the year 1936. Petitioner also claims an overpayment of $951.57.

Two questions are presented. The first is whether the nonrecognition provisions of the applicable revenue laws control in a transaction involving the Republic Steel Corporation and the Truscon Steel Co. The second question relates to the taxability on retirement of joint stock land bank bonds, the issues being whether the gain was exempt and, if not exemptSwhether it was capital gain under section 117(f) of the Revenue Act of 1936.

FINDINGS OF FACT.

Substantially all the facts are stipulated and are hereby found accordingly. Those facts hereinafter appearing which are not from the stipulation are facts otherwise found from testimony introcuced at the hearing.

Petitioner, an individual, resides in Santa Barbara, California. On October 24, 1930, she acquired by bequest 4,436 shares of the voting common stock (par value $10 per share) and 414 shares of the voting 7 percent cumulative preferred stock (par value $100 per share) of the Truscon Steel Co. (hereinafter referred to as Truscon).

Petitioner's bases for determining gain or loss for these stocks were their respective fair market values on October 24, 1930, which was $22 per share, or a total of $97,592 for the common stock and $93.33 1/3 per share or a total of $38,640 for the preferred stock.

Truscon is a Michigan corporation engaged in the manufacture, fabrication, and sale of steel products. In the years prior to the transaction in question it was a purchaser of steel from the Republic Steel Corporation (hereinafter referred to as Republic) and had numerous well located warehouses to facilitate distribution of its products.

Republic is a New Jersey corporation primarily engaged in the manufacture of steel.

At all times material herein the authorized capital stock of Truscon consisted solely of 7 percent cumulative preferred stock with a par value of $100 per share and common stock of the par value of $10 per share. Both classes of stock were voting stock.

Between August 21, 1934, and December 4, 1936, other than shares held in tis treasury, there were issued and outstanding approximately 33,000 shares of preferred and 766,000 shares of common stock. The stock of Truscon was widely held by the public. From May 1, 1934, at least through October 21, 1935, there were 3,646 or more common stockholders and 1,132 or more preferred stockholders.

Truscon common stock was listed on the New York and Detroit Stock Exchanges and Truscon preferred stock was listed on the Cleveland Stock Exchange.

Prior to August 21, 1934, the officers of Truscon and Republic frequently discussed the advantages of a permanent affiliation. On August 21, 1934, holders of 215,404 shares of common and 583 shares of preferred stock of Truscon entered into an agreement in writing with Republic looking toward the affiliation of these two companies.

The agreement recited, inter alia, that the parties to it were of the opinion "that a consolidation of Truscon and Republic and the acquisition and control of Truscon by Republic would be of substantial advantage to both companies."

Subject to certain conditions precedent, including the acquisition of the Corrigan, McKinney Steel Co., the the registration under the Federal Securities Act of 1933 of the offer of Republic stock deliverable under the plan (to which reference is hereafter made), and fundamental changes in the capital structure of Republic, it was agreed that Republic would "offer to all holders of outstanding Preferred Stock and Common Stock of Truscon the right to exchange their shares for shares of Prior preference Stock and Common Stock of Republic" on the following basis:

For each share of preferred stock of Truscon: 1/2 share of new 6 percent cumulative convertible prior preference stock, series A, of the par value of $100 per share, of Republic; and 2 shares of common stock without par value of Republic.

For each share of common stock of Truscon: 4/10 share of common stock without par value of Republic.

All such Republic stock was to be voting stock.

Republic was not to declare the offer effective until Truscon's directors had approved the offer and recommended its acceptance to the stockholders and at least 75 percent or such lesser percentage as should be agreed to by Republic, but not less than control, of each class of stock of Truscon was deposited for exchange under the terms of the offer.

The board of directors of Truscon approved "the offer of exchange of Republic securities for the Preferred and Common Stocks of Truscon" at a meeting held August 22, 1934, and recommended its acceptance by the stockholders.

The board of directors of Republic approved the agreement at a meeting held on August 27, 1934. This was a special meeting called by a notice dated August 21, 1934, for the purpose of considering and acting upon, inter alia: "An offer to acquire, on certain conditions, the outstanding shares of Truscon Steel Company in exchange for certain securities of this Corporation." At this meeting the matters considered were characterized as a plan.

A letter "containing a comprehensive statement of the entire plan" was sent by Republic to the holders of its preferred and common stock. Therein the plan was presented and explained under three headings, which were as follows:

1. To make the following fundamental changes in the capital structure of Republic:

* * *

2. To acquire the business, assets and good will of Corrigan, McKinney, a leading producer of semi-finished steel and a large producer of pig iron, * * *

* * *

3. To make an offer to the present Preferred and Common Stockholders of Truscon Steel Company, an important consumer of steel and a nation-wide manufacturer and distributor of fabricated steel products, to acquire such shares of Truscon (but not less than 75%) as are presented for exchange for Prior Preference Stock and Common Stock of Republic * * *.

With reference to "3" it was stated that "Republic has entered into an agreement with certain important stockholders of Truscon, including certain officials and directors, which obligates them to exchange their stock on the agreed basis if and when the offer is made."

The agreement between Republic and Truscon stockholders provided that the offer of exchange should be made by November 30, 1934. There was unanticipated delay. The time required to prepare and obtain an effective date for the securities registration statement for the stock, and the defense of an antitrust suit by the Federal Government to enjoin the acquisition of the Corrigan, McKinney Steel Co. prevented Republic from making the offer within the time provided. The Government was unsuccessful in the District Court in the antitrust litigation and in October 1935 announced its intention not to appeal from the District Court's decision.

By agreements dated November 27, 1934, February 14, 1935, and July 23, 1935, between Republic and signatory Truscon stockholders, the time within which Republic might make the offer of exchange was successively extended to June 16, 1936. These extensions were duly approved by the Truscon and Republic boards of directors.

On August 22, 1935, Republic filed its registration statement and amendments thereof with the Securities and Exchange Commission in connection with the exchanges of Republic stock for Truscon stock.

Forms of transmittal letters of, and deposit receipts for, preferred and common stock of Truscon were filed as a part of the registration statement. These forms provided for the direct delivery to and receipt by Republic of Truscon stock and the delivery by Republic to Truscon stockholders of Republic stock. At a meeting of the board of directors of Republic held on September 9, 1935, the forms of the transmittal letters and deposit receipts were changed, and as changed they were thereafter filed with the Exchange Commission and used for their designated purposes.

As so changed the forms of proposed letters of transmittal were addressed "To Truscon Holding Company", and stated, e.g.:

There are enclosed herewith for deposit under and subject to the Exchange Offer made by Republic Steel Corporation * * * to Preferred Stockholders of Truscon Steel Company * * * set forth in the Prospectus of Republic, dated September 11, 1935, certificates for shares of the 7% Preferred Stock of the company as follows:

* * *

The undersigned hereby acknowledges receipt of a copy of the above-mentioned Prospectus of Republic, dated September 11, 1935 * * *.

As changed, the letter of transmittal covering surrender of the deposit receipts was "To Truscon Holding Company", and stated, e.g.:

There are surrendered herewith for exchange in accordance with the terms thereof, Deposit Receipts for Common Stock of Truscon Steel Company as follows:

* * *

Please deliver, registered in the name in which the Deposit Receipts are registered, certificates for the number of shares of Common Stock without par value of Republic Steel Corporation (hereinafter called Republic) called for by the terms of said Deposit Receipts, i.e., 4/10ths of a share of said Common Stock of Republic for each share Common Stock of Truscon Steel Company represented by said Deposit Receipts. * * *

As changed the receipts were headed, e.g.:

Non-negotiable receipt for preferred stock of Truscon Steel Company (a Michigan Corporation) deposited under the exchange offer made by Republic Steel Corporation to preferred stockholders of Truscon Steel Company, set forth in the Prospectus, dated February 11, 1935, of Republic Steel Coporation.

The receipt certified the deposit of shares of stock and provided that the depositor:

* * * by receiving this receipt, assents to and accepts the terms and conditions of said Exchange Offer, and, in the event said Exchange Offer shall become effective and be carried out as provided in said Prospectus, will be entitled to receive, upon presentation and surrender of this Receipt to the undersigned subsidiary corporation of Republic at the office of either of the depositaries, 1/2 share of 6% Cumulative Convertible Prior Preference stock, Series A, of the par value of $100 per share, and 2 shares of the Common Stock, without par value, of Republic, for each share of preferred stock of the Company represented by this receipt, as described in said Prospectus * * *.

* * *

TRUSCON HOLDING COMPANY

By

President.

On the reverse side was a form for acknowledgment of receipt of Republic stock.

On September 9, 1935, the board of directors of Republic approved and authorized "the making to the stockholders of the Truscon Steel Company of the offer * * * set forth in the form of Prospectus * * *."

The registration statement became effective on September 10, 1935.

By letter dated September 11, 1935, Republic made a conditional offer in writing to all the common and preferred stockholders of Truscon for the exchange of Truscon stock for Republic stock. The letter enclosed a copy of the prospectus.

The prospectus in part stated:

* * * The Corporation [Republic] reserves the right to cause the shares of Truscon Steel Company deposited for exchange to be acquired on such exchange by a subsidiary corporation, all of the capital stock of which will be owned by the Corporation, or to cause such subsidiary corporation to aquire the rights and assume the obligations of the Corporation in respect of such offer in the first instance.

In the above mentioned letter to the stockholders of Truscon, attention was called to the fact that Republic, under the terms of the prospectus, was causing the offer to be carried out by the Truscon Holding Co., a wholly owned subsidiary of the Republic Steel Corporation, organized for the purpose. In this regard the letter stated: "Stockholders will understand that such fact in no way affects the character or terms of the offer."

Truscon, by letter dated September 11, 1935, recommended to all holders of its preferred and common stock the acceptance of the Republic offer of exchange. The letter makes no direct mention of the Truscon Holding Co. but refers to the prospectus and concludes with a recommendation citing the advantages of the "acquirement of Truscon stock by Republic."

On September 25, 1935, petitioner deposited all of the shares of common and preferred stock of Truscon owned by her, endorsed in blank, accompanied by the indicated transmittal letter fully filled out and properly signed. Nonnegotiable deposit receipts for these preferred and common stocks were issued to petitioner on the above mentioned forms.

On September 23, 1935, Republic stockholders duly approved and authorized Republic's plan of acquisition and recapitalization and specifically approved the plan to acquire Truscon stock as set forth in the agreement of August 21, 1934, and in the prospectus.

On October 22, 1935, Republic, by letter addressed and sent to all Truscon stockholders, advised that:

* * * the Exchange Offer to holders of Preferred Stock and Common Stock of Truscon Steel Company, a Michigan corporation, set forth in the Prospectus issued by Republic Steel Corporation under date of September 11, 1935, has been declared effective.

* * *

Holders of deposit receipts were called upon to surrender them for Republic stock and:

Holders of Preferred Stock and Common Stock of Truscon Steel Company who have not already accepted the Exchange Offer, may do so by depositing their stock certificates with either of the Depositaries named above, on or before June 15, 1935, in exchange for the Prior Preference Stock and Common Stock of Republic Steel Corporation on the basis set out above. * * *

On November 1, 1935, petitioner surrendered her nonnegotiable deposit receipts for her 414 shares of preferred stock and her 4,436 shares of common stock of Truscon, accompanied by appropriate letters of transmittal, and on November 18, 1935, received therefor 207 shares of the 6 percent cumulative convertible prior preference "A" voting stock of Republic, par value $100 per share, together with 828 shares of the no par value voting common stock of Republic and 1,774.4 shares of the no par value common voting stock of Republic, respectively.

On November 1, 1935, at least 80 percent of each class of the stock of Truscon had been deposited by Truscon stockholders and accepted for exchange. Republic, by action of its board of directors, extended the offer of exchange to preferred and common stockholders of Truscon throughout the year 1935 and until December 4, 1936, at which date 98.5 percent of the preferred stock and 96.6 percent of the common stock of Truscon had been deposited for exchange.

The Truscon Holding Co. was organized as a Delaware corporation on September 9, 1935. It was dissolved on December 5, 1936.

The Truscon Holding Co. was organized at the instance of Republic and pursuant to a resolution of its board of directors adopted at a meeting on August 21, 1935, which stated that "it was advisable that the Corporation [Republic] cause to be incorporated a wholly owned subsidiary to take title to the Preferred and Common Stock of Truscon Steel Company exchanged for securities of this Corporation."

There are no minutes of any meeting prior to that date which indicated an intention on Republic's part to organize such a wholly owned subsidiary corporation. The Truscon Holding Co. was organized upon the suggestion of Republic's counsel first made shortly before August 21, 1935.

A letter dated September 11, 1935, to the Truscon Holding Co. from Republic, after outlining the proceedings, contained the following:

It is our desire and intent, upon your acceptance hereof, to have you assume and carry forward such offer so to be made to Truscon stockholders, and our obligations in such regard contained in said contract of August 21, 1934, and as you will observe, we have stipulated for such a program in our offer to Truscon stockholders. This will include among other things the sending of transmittal letters addressed to you to all Truscon stockholders to accompany their stock upon deposit. We will be glad to enclose such transmittal letters with the prospectuses to be sent by us as above mentioned. It will also include issuance of deposit receipts by you against Truscon stock deposited for exchange.

To the end of putting you in position to effectuate the proposed offer, we undertake that if and when requested by you, upon the offer being declared effective in accordance with its terms, we will issue to you in exchange, share for share respectively, for your Preferred and Common Stock to be issued to us, such number of shares of our 6% Cumulative Convertible Prior Preference Stock, Series A, and of our Common Stock without par value, as shall be required by you to effectuate the offer of exchange to truscon stockholders in accordance with the terms thereof. This will necessitate proper amendment of your Certificate of Incorporation, so as to provide for the authorization of sufficient additional Common Stock and of a Preferred Stock issue of an authorized amount sufficient for the purposes aforesaid. Such Preferred Stock would have a par value of $100 per share, would entitle the holders to cumulative dividends at the rate of 6% per annum and would otherwise contain such provisions as are normal and ordinary in Preferred Stock issues. It is to be understood between us that prior to request upon us as aforesaid, you will effect such changes in your capitalization subject to our approval. This undertaking is of course subject to prior fulfillment of those conditions subject to which by its express terms the offer to Truscon stockholders is made and to continuation of your financial status and capitalization substantially as the same now are (subject only to the change in capitalization above provided for).

* * *

The offer contained in this letter was accepted; forms of deposit receipts were approved and depositaries appointed.

At a meeting of Republic's board of directors on September 19, 1935, the action of Republic's officers in arranging for the deposit of Truscon stock with depositaries, acting for the Truscon Holding Co., and the issue of nonnegotiable receipts by the Truscon Holding Co., was approved.

At the same meeting the board authorized, on the written directions of officers of Republic, the issuance of the necessary stock to the Truscon Holding Co. in order to complete the arrangements previously made for the "carrying out of the offer of exchange made to holders of Preferred Stock and Common Stock of Truscon Steel Company pursuant to said Plan and the Prospectus issued by this Corporation, to said holders under date of September 11, 1935."

The record does not indicate any corporate action taken by the Truscon Holding Co. until its dissolution, December 1, 1936. The minutes of this meeting contain the following:

The President then asked the Board to consider the advisability of dissolving the Corporation forthwith. He stated that the Corporation had been organized in order to facilitate the exchange of Preferred and Common Stock of Republic Steel Corporation for Preferred and Common Stock of Truscon Steel Company in connection with the offer of exchange made by Republic Stell Corporation t0 Preferred and Common stockholders of Truscon Steel Company. He stated that such offer to the Preferred stockholders of Truscon Steel Company had been terminated, effective December 4, 1936, and that while the offer to the Truscon Common stockholders would remain open for the present, there were relatively few shares of that stock outstanding, and in consequence thereof the expense incident to the continuation of Truscon Holding Company would not be justified. He further stated that all of the liabilities of the Company had been paid or provided for, and that the sole owner of the entire outstanding capital stock of the Company, namely, Republic Steel Corporation, desired the dissolution of the Company.

After full discussion, on motion duly made, seconded and unanimously carried, the following resolutions were adopted:

RESOLVED, That in the judgment of its Board of Directors it is advisable and most for the benefit of Truscon Holding Company that said Company should be dissolved; * * *

The officers and directors of the Truscon Holding Co. were officers, directors, or employees of Republic; it had no bank account, did not pay any salaries or other compensation to its officers, and paid no rent. It made no direct offer to holders of Truscon stock for exchange of such stock for Republic stock. Republic never actually paid the sum of $1,000 or any part thereof for the 1,000 shares of its capital stock as provided in the agreement of September 11, 1935, but took care of it by book credits.

Under the refinancing plan of Republic it was provided that there should be a new general mortgage to be dated September 1, 1935, and that prior mortgages, including the March 17, 1910, mortgage (hereinafter referred to as the 1910 mortgage) would be discharged and its bonds refunded.

The sole purpose for which the Truscon Holding Co. was organized was to permit the acquisition of Truscon stock without restricting Truscon or preventing it from issuing securities, or borrowing money. The latter would not have been permitted if the stock had been owned by Republic and deposited under its existing 1910 mortgage under which Republic was mortgagor and which contained an after-acquired property clause and a covenant to the effect that any new securities issued by a corporation, the majority of whose capital stock is pledged under the mortgage, should become subject to the mortgage.

Notice of redemption by Republic of the 1910 mortgage was given on February 4, 1936, and Truscon bonds to finance borrowings by Truscon were not issued and delivered until February 7, 1936. The 1910 mortgage was discharged April 1, 1936. Practically, the reasons which prompted the organization of the Truscon Holding Co. never became operative.

The management and board of directors of the Truscon Holding Co. and of Republic understood that the Truscon Holding Co. was formed to fulfill a temporary purpose, and that it was to have a limited, temporary existence.

Truscon stockholders were not advised as to the reasons for the organization of the Truscon Holding Co.

In functioning, the Truscon Holding Co. accepted for deposit the Truscon stock, issuing therefor in the first instance its deposit receipts and afterwards, upon surrender thereof, delivered to the depositors the shares of Republic stock represented by the receipts. After the offer was declared effective, it accepted Truscon's stock and issued therefor counter receipts against which it later delivered the shares of Republic stock.

Up to and including December 4, 1936, 739,508 shares of common and 32,712 shares of preferred stock of Truscon were deposited for exchange by Truscon stockholders. Certificates for such shares were issued in place thereof in the name of the Truscon Holding Co. On dissolution these certificates were delivered to Republic, which received new certificates in lieu thereof from Truscon on December 7, 1936.

Republic has ever since been the owner of the Truscon stock.

Between October 22, 1935, and December 4, 1936, there were issued 16,356 shares of Republic preferred stock and 361,227.2 shares of Republic common stock to holders of Truscon stock who had deposited their shares of Truscon stock in exchange for stock of Republic. The Republic stock was issued directly in the names of the depositing stockholders of Truscon. No Republic stock was issued in the name of the Truscon Holding Co.

The Truscon Holding Co. did not issue any of its stook until January 17, 1936, when its originally authorized 1,000 shares of common stock were issued in the name of Republic. It issued no further stock until February 12, 1936, from which date until December 2, 1936, there were issued additional certificates for common and preferred stock in the name of Republic, to a total amount of 362,227.2 shares of common and 16,356 shares of preferred stock.

Republic did not deliver any of the Truscon Holding Co. stock to the trustees under the 1910 mortgage but placed it in escrow, under an agreement whereby it would eventually lodge where it should lodge legally. It went to the trustees under its new general mortgage, and after the dissolution of the Truscon Holding Co. the Truscon stock was substituted.

Between February 28 and March 3, 1936, petitioner sold for the sum of $44,217, 1,774 shares of the 1,774.4 shares of the Republic stock received by her as above set out in exchange for the Truscon common stock which she had acquired on October 24, 1930.

During the year 1930, petitioner acquired interest-bearing bonds of the Chicago Joint Stock Land Bank in the face amount of $10,000, with interest coupons attached. The basis for determining gain or loss for these bonds is $5,200. The bonds were retited by the bank, and prior to the year 1936 petitioner received $6,000, and during the year 1936 received $1,019.88, upon such retirement.

OPINION.

OPPER: We are asked to determine whether a nontaxable ¹ reorganization occurred when the stockholders of Truscon transferred virtually the entire stock of that company in exchange for stock of Republic by turning over their shares to Republic's wholly owned subsidiary, a corporation organized for the purpose of taking the stock, which, after about a year, transferred the Truscon stock to Republic and was dissolved.

There should be little doubt that a transfer to a subsidiary is not the equivalent of a transfer to the parent, Groman v. Commissioner,302 U.S. 82">302 U.S. 82; that in such circumstances the subsidiary and not the parent is the party to the reorganization; and that if the parent's stock is involved, its receipt is not freed from tax by the reorganization sections. Anheuser-Busch, Inc.,40 B.T.A. 1100">40 B.T.A. 1100; affd. (C.C.A., 8th Cir.), 115 Fed.(2d) 662; certiorari denied, 312 U.S. 699">312 U.S. 699. It is equally clear that a plan must be viewed as a whole and that if the transferred property, although designed to pass temporarily through one corporation, is intended to rest permanently in another, the holding by the first may be of such a transitory nature as to be without real substance. Helvering v. Bashfore,302 U.S. 454">302 U.S. 454. Hence, if the Truscon stock passing through the Truscon Holding Co., Republic's subsidiary, was intended to come to rest in Republic, it could safely be concluded that a plan of reorganization involving an exchange of stock of Republic for stock of Truscon had been completed, and that, both corporations being parties to the reorganization and Republic having acquired at least 80 percent of the voting stock and at least 80 percent of the total number of shares of all other classes of stock of Truscon, the nonrecognition provisions, specifically section 112(b)(3), would have become operative.

The issue then appears to narrow itself to the question whether dissolution of the Truscon Holding Co. and transfer by it to Republic of the Truscon stock may be considered to have been a part of the plan of reorganization. In Anheuser-Busch, Inc., supra, assets were transferred from the petitioner in that case to Borden and immediately retransferred by Borden to its subsidiary, pursuant to an option specified in the plan of reorganization. The petitioner had received Borden stock in exchange and the question was whether the transaction was covered by the nonrecognition provisions of section 112. We held that it was not and said, at page 1107:

We need not decide whether the result would be different if the transfer to Borden's subsidiary had occurred after a significant interval. The question might then arise as an issue of fact whether the subsequent transfer was part of the effectuation of the plan of reorganization or independent of it.

Here, although the situation is reversed as to the order of the transfers, the question we disregarded in Anheuser-Busch must be answered. For if the "continuity of interest" required for the application of the nonrecognition provisions may be gathered from the transfer of Truscon stock to Republic as a part of the plan of reorganization, even though that transfer took place after an appreciable period, we should be justified in holding that the two principal corporations were parties to the reorganization and that the intervention of the subsidiary was temporary and inconsequential.

In considering the comparable question in the Anheuser-Busch case, the Circuit Court of Appeals for the Eighth Circuit, affirming the Board, emphasized the indications appearing from the plan of reorganization that (p. 666):

* * * It was not intended * * * to merge or consolidate the business * * *. The sole object and accomplishment of the plan was to transfer the business of New York, a subsidiary of the taxpayer, to Delaware, a subsidiary of Borden. It was clearly not contemplated that the taxpayer should continue to have a substantial interest in the business which was transferred. The contract itself negatived any purpose to retain that continued interest required in a merger.

Applying a similar test to the negotiations and transactions which accompanied the present exchange, we are led to the conclusion that a merger of the two businesses and a continuity of interest in the merged enterprise was intended. Among other things, the prospectus filed by Republic announced:

* * * the [Republic Steel] Corporation will obtain control of a diversified steel fabricating enterprise which has been for some time a large buyer of the Corporation's steel products and should increase its use of such products. Truscon Steel Company has numerous well-located warehouses which should also facilitate the distribution of the other products of the combined enterprise.

A similar thought finds expression on the part of the other party to the transaction, Truscon, in its letter recommending the exchange to its stockholders, in which it says:

* * * Truscon would become directly affiliated with a rolling mill and would therefore be in an advantageous position in the purchase of its materials. The combined enterprise could control its materials from the ore to the finished product * * *. Our stockholders will acquire in this exchange the securities of the third largest steel corporation of this country.

While the terms of the documents themselves may not be entirely unambiguous as to what the plan of reorganization designed for the eventual disposition of the Truscon stock, we think the explicit purpose of the parties typified by the quoted passages, together with what actually came to pass, is sufficient to resolve any such ambiguity. We think they justify our conclusion that the plan contemplated a merger of the two enterprises rather than the conduct of the acquired business by the vanishing subsidiary, and that it envisaged a continuity of interest in the merged enterprise on the part of those in receipt of its securities. We accordingly take the view that the nonrecognition provisions are applicable and that respondent erred in his determination on this issue.

The remaining question involves gain resulting from the redemption of joint stock land bank bonds. Petitioner's contention that such gain is exempt has been ruled upon adversely. United States v. Stewart,311 U.S 60. Since respondent now recedes from his earlier position and concedes that such gain is capital gain under the provisions of section 117(f), this issue need not be further considered. Cf. William H. Noll,43 B.T.A. 496">43 B.T.A. 496.

Reviewed by the Board.

Decision will be entered under Rule 50.

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Footnotes

• 1. SEC. 112. RECOGNITION OF GAIN OR LOSS. [Revenue Act of 1936.]

  * * *

  (b) EXCHANGES SOLELY IN KIND. -

  * * *

  (3) STOCK FOR STOCK ON REORGANIZATION. - No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

  * * *

  (g) DEFINITION OF REORGANIZATION. - As used in this section and section 113 -

  (1) The term "reorganization" means (A) a statutory merger or consolidation, or (B) the acquisition by one corporation in exchange solely for all or a part of its voting stock: of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of another corporatiion; or of substantially all the properties of another corporation, or (C) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (D) a recapitalization, or (E) a mere change in identity, form, or place of organization, however, effected.

  (2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another. ↩